CHICAGO — As Minnesota entered its fifth day of a government shutdown, Gov. Mark Dayton and legislative leaders resumed budget negotiations Tuesday as a bipartisan set of former state officials announced the formation of a group that will try to bridge the current political divide over a $5 billion deficit.

Most state government operations shut down on Friday as the new fiscal year began with the governor and Republicans who control the Legislature unable to resolve their budget impasse. Construction projects across the state were idled and more than 20,000 workers were furloughed.

Dayton, a member of the state's Democratic-Farmer-Labor party, wants to raise income taxes on Minnesota's wealthiest residents to curtail deeper cuts in education, public safety, and health and human services spending. Republicans refuse to support any tax hikes.

State debt service would continue to be paid under an ongoing appropriation and was further enforced by a court order last month that included debt obligations in the list of critical and core state functions that remain in force and operational during the shutdown.

State debt managers also note that in December of each year the government transfers the amount necessary from the general fund to a debt service fund to cover general obligation debt service owed in the next fiscal year. A standing appropriation is in place to cover debt service on most state lease-backed and revenue bonds.

"Our major difference remains the same. It is the difference between my balanced approach of significant spending cuts combined with income tax increases only on the very wealthiest Minnesotans, versus the Republicans' 'all-cuts' budget," said Dayton, who campaigned on the use of tax increases and cuts to balance the budget.

Republicans, who took control of the Legislature after the November election, are sticking with their no-tax increase campaign pledge.

"Unfortunately, Gov. Dayton has chosen to prioritize his rigid, tax-and-spend ideology, rather than prioritize the best interests of Minnesotans as we move into the holiday weekend," Senate Majority Leader Amy Koch said late last week.

Former Democratic Vice President Walter Mondale and former Republican Gov. Arne Carlson announced Tuesday the formation of a group charged with developing their own compromise solution.

Carlson's finance commissioner and former Democratic representative Wayne Simoneau and former Republican Sen. Steve Dille will lead the group.

"We're in a place where both sides have to sit down and think freshly about how we can come out with a result that serves Minnesota," Mondale said.

Carlson and Mondale will not participate. Dayton will cooperate by providing access to his finance commissioner, Jim Schowater. The group is expected to announce their ideas by the end of the week.

Negotiations between Dayton and lawmakers resumed Tuesday afternoon and the governor asked the state court to broaden the services deemed critical that can remain open during the shutdown.

Dayton wants a two-year general fund budget of $35.7 billion. That's down from a $35.8 billion plan he originally sought, but still $1.4 billion beyond what the GOP says it can stomach. Republicans last week proposed closing the gap by delaying $700 million in school aid payments and issuing tobacco bonds.

Dayton rejected both nonrecurring revenue sources. The state has relied heavily on similar measures to balance recent budgets and those maneuvers are now blamed in part for the size of the state's current deficit.

Minnesota's last government shutdown occurred in 2005 and lasted for eight days. Moody's Investors Service in a report last week said the state's credit should weather a shutdown, especially if it is short in duration.

The state's annual summer GO sale to fund projects approved in recent capital budgets must also await resolution of the budget issue. Minnesota's $5 billion of GO bonds have AAA marks from Fitch Ratings and Standard & Poor's and Aa1 from Moody's.

All assign stable outlooks. The state's latest revenue forecast issued in early March brought the deficit down to $5 billion from $6.2 billion.

Several of the Midwest's other states struggled to agree on budgets but managed to enter the fiscal year with spending plans in place.

In Iowa, the state's Democratic-controlled Senate and Republican-led House fought over spending levels while GOP Gov. Terry Branstad pushed for a two-year budget instead of the traditional one-year plan.

Lawmakers late last week agreed to a $6 billion budget that holds education spending steady in fiscal 2012 and increases it by 2% in the second year. Lawmakers agreed to approve spending for the next two fiscal years, but they did not include property tax reforms sought by Branstad.

The state, which carries triple-A issuer credit marks, expects to close out the current fiscal year with more than $400 million in cash reserves and another $135 million in an emergency reserve. The budget does not authorize any new borrowing. In their most recent reviews, credit agencies affirmed Iowa's top issuer ratings.

"Significant progress was made to ensure ongoing state programs are paid for from ongoing state revenue sources," Branstad said in praising passage of the spending plan. He also lauded passage of the new Iowa Partnership for Economic Progress, a public-private partnership to replace the current Iowa Department of Economic Development.

In Ohio Gov. John Kasich signed a new $56 billion, two-year general fund budget Thursday night and spent the next several days touring the state to tout the new spending plan.

The budget closed a roughly $6 billion shortfall in part by selling off several lucrative state assets and also paved the way for a long-term lease of the Ohio Turnpike. Local government funding was slashed.

The spending plan eliminates the estate tax, reduces the income tax, and restructures Medicaid payments. Among its more controversial features are changes to the public construction contracting process and the establishment of merit pay for teachers.

Michigan crafted a new budget that features deep cuts to local government spending and widespread policy changes. Gov. Rick Snyder two weeks ago signed the $47.4 billion general fund 2012 budget, marking the earliest finish to the state's fiscal budget process in three decades. Michigan's fiscal year begins Oct. 1.

The spending plan cuts school and local government aid and sets aside $641 million in the state's rainy-day fund. Snyder has said his next priority is passage of a bill allowing the state to enter into a public-private partnership for a new $4 billion bridge between Michigan and Canada.

In Indiana, lawmakers in early May passed a $28 billion two-year general fund budget that featured several bond provisions, but not a controversial bill allowing fiscally stressed municipalities to file for bankruptcy.

Nebraska's new two-year general fund budget totals $7 billion. Lawmakers closed an estimated $1 billion shortfall with cuts and no new taxes. As part of the budget, lawmakers passed a measure that allows the state to divert a piece of the sales tax to back bonds to finance highway construction.

North Dakota, amid its roaring energy boom, got a new $9.9 billion budget for 2012-13 in April that features $500 million in tax cuts, including property taxes. The debt-free spending plan includes nearly $1 billion of infrastructure projects financed with cash and features $1 billion of reserves.

South Dakota lawmakers ended their brief legislative session in March by passing a $3.9 billion all-funds 2012 budget balanced with cuts, fulfilling Gov. Dennis Daugaard's promise to eliminate the structural deficit without dipping into reserves or raising taxes.

In Missouri, Gov. Jay Nixon recently signed into law a $23 billion fiscal 2012 budget after cutting $172 million from the plan approved by lawmakers in order to keep spending in line with expected revenue and setting aside $50 million for recent weather-related disasters.

The plan eliminates 863 positions. It doesn't authorize any new borrowing but it does rely on about $20 million in one-time savings by pushing off debt service coming due over the next two years in two restructurings.

In Wisconsin, freshman Gov. Scott Walker recently signed a two-year $66 billion budget into law that dealt with a $3 billion deficit, primarily with cuts.

In Illinois, Gov. Pat Quinn last week signed into law a $32.99 billion budget for fiscal 2012 that carries over more than $8 billion of unpaid obligations into the new fiscal year. Quinn signed the budget just hours before the start of the new fiscal year.

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